Analyst: Gambro buy a good use of Baxter's cash

December 6, 2012

DEERFIELD, ILL. (Dec. 6, 12:40 p.m. ET) — Buying Lund, Sweden-based Gambro for $4 billion, including assumed debt, is a good way for Deerfield-based Baxter International Inc. to use its offshore cash, analyst Danielle Antalffy, with Boston-based health investment bank Leerink Swann LLC, said in a research note on Dec. 4, after the deal was announced.

Baxter’s offshore cash accounts for more than two-thirds of its $3 billion in cash, Antalffy noted. With $1.6 billion in annual revenue, Gambro is a leading manufacturer of equipment and products for hemodialysis, or HD, one form of the transfusion treatment for patients with kidney disease. Baxter, with annual revenue of $13.8 billion, was a pioneer in that field but changed its focus to peritoneal dialysis, or PD, another transfusion therapy, which patients can give themselves at home. HD is usually performed in a clinic or hospital.

Gambro acquisition not without challenges

Some “yellow flags” could complicate the Gambro acquisition, which should be a positive transaction for Baxter, according to a research note issued by Chicago-based investment firm William Blair & Co. LLC. “Gambro has reported relatively flat growth over the past several years,” analyst Ben Andrew wrote, “and we believe it will take at least a year after closing before growth reaccelerates.”

Another cause for concern is the recent weak quarter by the world’s top dialysis product manufacturer, Bad Hamburg, Germany-based Fresenius Medical Care AG, which blamed poor sales on the economy. Overall, the deal should strengthen Baxter’s position in a growing kidney treatment market, bumping its renal revenue to 25 percent of sales, from 20 percent, and generating an estimated $300 million in annual cost synergies by 2017, he said. The yellow flags “are not impossible to overcome, and we believe Baxter will be able to do so over time as they cross-fertilize products from both companies across their combined geographic footprint,” the Blair report said.

Expansion into Europe is a question

Moody’s Investors Service Inc. said Dec. 4 that it placed Baxter’s longer-term A3 debt rating on review for a possible downgrade. “The size of the transaction and company’s plan that this will be funded with $3 billion of additional debt creates concern,” according to a news release. “Furthermore, we believe a significant portion of Gambro’s sales are derived from Europe, which is currently undergoing greater contraction due to austerity measures.” Standard & Poor’s Financial Services LLC warned of a possible downgrade last week.